Opinion: 7 business rules from Stitch Fix’s CEO that don’t all come in a box

Every successful business breaks at least one rule. This is how Katrina Lake found retail success

David Paul Morris/Bloomberg

Stitch Fix CEO Katrina Lake, pictured in May.

By

TrenGriffin

Katrina Lake is the founder and CEO of Stitch Fix. The magnitude of what she accomplished in building this business is highly underappreciated: She took a clothing retailer public in November 2017.

This is a remarkable accomplishment given the financial state of retail in the United States and the challenges facing Nordstrom
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and others. Lake did so by finding sustainable competitive advantage using some of the most advanced technology in the retail industry.

Stich Fix investor and board member Bill Gurley has said this about what she has accomplished: “One of the unique things about Stitch Fix
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relative to all the unicorns in Silicon Valley is they’ve run a very disciplined and profitable approach. They’ve been profitable for several years. The reason that you never heard of them as a unicorn is that they never raised money over a billion because they didn’t need to raise money.”

1. “In business school, one of the areas that interested me was hunting and fishing. [But] I was not super passionate about the category. I can’t imagine devoting my whole life to it.”

Lake did not decide to create a biotech, blockchain, e-sports or enterprise security business because it would have been fashionable. She is passionate about fashion and retail.

Missionaries are far more likely to be successful business founders than mercenaries because their desire to solve a real customer problem enables them to persevere when things inevitably get tough. Mercenaries are motivated by money. Missionaries are driven by a cause.

It is a terrible idea to start a business because it is a hot sector or because people currently think it is glamorous.

2. “I would buy clothes at boutiques around Boston, then bring them to people’s houses. I’d watch them try on the clothes, ask them questions, and have them fill out a survey, gathering as much data as I could.”

Too many businesses fail to prove a value hypothesis before trying to prove a growth hypothesis. If you don’t have a product that customers are willing to buy, nothing else matters. Spending cash on growth before product market or fit is discovered is a proven way to destroy shareholder value.

Lake cleverly used a classic viable product (MVP) approach to prove her value hypothesis. She intentionally did some things that she knew would not scale as part of this MVP. For example, she acquired inventory knowing that she could return products people did not buy but that would generate data that would allow her to raise funds to build her business.

3. “It was hard to raise money. We always treated every dollar very preciously and focused early on profitability. There are companies out there that may have failed because they had too much money and never had to think about the economics of their business.”

Failure to understand the unit economics of a business is inevitably a fatal mistake. Every business has a cost to acquire a customer, a cost to serve a customer, a cost of goods sold, a revenue per customer and an opportunity cost of capital. Lake knows the only unforgivable sin in business is to run out of cash. For example, she lived through a period in which Stitch Fix had only eight weeks of cash remaining and lived to tell that tale.

Stitch Fix now has $120 million from the IPO. Criticizing the IPO for not resulting in a stock-price “pop,” which benefits investment banks rather than shareholders, is rubbish. Improving the reputation of the investment bank for building future IPO order books represents zero justification for selling Stitch Fix shares at below market value.

4. “I’m not valuation-focused, so we weren’t going to raise money if we didn’t need it.”

More businesses die from indigestion than starvation. Business that raise too much money often resolve problems with money that could be fixed with innovation and a stronger company culture. Too much money also tends to cause business to start off on the growth hypothesis far too early. People can lose discipline about expenses. Frugality is a part of a sound company culture.

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5. “We collect information from you, what we know from inventory, what we know from other people, and all of that helps to inform the data and algorithm side, which generates recommendations for the stylists.” “Fundamentally what we’re offering is personalization. Our data can say, for example, this client has a 50% chance of keeping this denim.”

Without some barrier to entry, the price of a product inevitably drops to a point where financial returns don’t exceed the opportunity cost of capital. In other words, every business needs a moat, which limits supply to some extent, so they can generate a profit. Stitch Fix has had to find ways to thrive financially in a retail environment inhabited by businesses like Amazon. It is smartly focused on providing a differentiated personalized experience for its customers. Many people would be shocked by how many data scientists work at Stitch Fix and the sophistication of their technical stack.

6. “There’s going to be a day when everything is amazing and another day when everything is terrible. It’s an emotional roller coaster when you’re the founder, especially in those early days.”

It is thrilling to start a new business and even more thrilling if you eventually create a great financial success. But in between those two end points is a grueling period which inevitably involves struggle and gyrating emotional states. Entrepreneur, author and investor Scott Belsky has said that it is in the “messy middle” between founding a company and an event like an IPO that reputations get made via execution, optimization and endurance.

Venture capitalist Megan Quinn adds: “Katrina built an incredible business with grit and discipline. She shunned the Silicon Valley mantra of valuation at all costs in favor of sustainable unit economics and profitability. She is the real Valley success story — one founded in fundamentals and sincere dedication to solving a customer problem.”

7. “I met more than 100 entrepreneurs and realized that all these entrepreneurs were just as unqualified as I was.”

There is no magic formula for creating a successful business. Best practices do exist which you can learn on your own, in a job or in business school. But every successful business breaks at least one rule, which the root cause of innovation.

Lake has blazed a new trail in the retail industry by applying “money ball”-style analytics to retail fashion. Stitch Fix’s use of machine learning and big data is unprecedented. Her story is inspirational.

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